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  • Draft Tax Omnibus Law | 1

    Draft Tax Omnibus LawTax Alert March 2020

    On 31 January 2020, the Indonesian Government submitted a draft of the Law of Provisions and Tax Facilities to Encourage the Economy (“Tax Omnibus Law”) to the Parliament. It is expected that the draft law will be discussed in the 2020 Priority National Legislation Program between the Government (represented by the Finance, Home Affairs, and Legal and Human Rights Ministries) and the Parliament.

    The Tax Omnibus Law, if passed, would be the most significant change to the Indonesian tax system in some time, noting that it has been over 10 years since the last amendments to the three key Indonesian tax laws. The proposed changes would have implications for any business operating in Indonesia, as well as many foreign entities making web-based or electronic sales to Indonesian customers. On the whole, Indonesian taxpayers are likely to welcome the changes, given they contain a number of ‘fixes’ to long-standing concerns with the Indonesian system, pro- business measures and a significant corporate tax rate cut.

    This is balanced against a clear desire to levy tax on online businesses currently operating without an Indonesian taxable presence.

    This Tax Alert provides an overview of key proposed changes. The final form of legislation passed by the Parliament will need to be reviewed in detail in due course.

  • 2 | Draft Tax Omnibus Law

    There will be at least nine laws that will be affected by the Tax Omnibus Law. Interestingly, many substantive changes will not be inserted into these other laws, but the Tax Omnibus Law would change their operation. They are:

    1. Law on General Provision and Taxation Procedures (“UU KUP”);

    2. Income Tax Law (“UU PPh”);

    3. Value Added Tax (VAT) Law (“UU PPN”);

    4. Customs Law (“UU Kepabeanan”);

    5. Excise Law (“UU Cukai”);

    6. Law on Information and Electronic Transaction (“UU ITE”);

    7. Capital Investment Law (“UU Penanaman Modal”)

    8. Law on Regional Tax and Regional Levy (“UU PDRD”); and

    9. Regional Government Law (“UU Pemerintah Daerah”)

    The Government states that the Tax Omnibus Law is designed to strengthen the Indonesian economic sector by way of providing tax facilities that are expected to increase investment, improve fairness and equality in conducting business, as well as to improve the quality of human resources.

    We have summarized key aspects of the draft Tax Omnibus Law into broad categories consistent with the approach taken in the authorities’ press releases and some media reporting:

    A. For the purpose of increasing the attractiveness of Indonesia as an investment destination country

    1. Reduction in the corporate income tax rate

    a) The current income tax rate for a corporate taxpayer or permanent establishment (PE) of 25% will be decreased to 22% for fiscal years 2021 and 2022; and further decreased to 20% starting fiscal year 2023;

    b) For a domestic corporate taxpayer with public company status, where at least 40% of its total shares are traded in the Indonesia Stock Exchange (IDX), could have a further decrease in the corporate income tax rate of 3%, so that its corporate income tax rate is 19% for fiscal years 2021 and 2022; and 17% starting fiscal year 2023.

    With the reduction of the corporate income tax rate, the rate of withholding tax (“WHT”), as prepaid tax credit (i.e. Article 22 on import, and Article 23 WHT on domestic interest and royalty) may need to be revisited. Otherwise, the likelihood of tax overpayment will increase.

    2. Elimination of income tax on dividend and other offshore income

    The draft provides for new exemptions for dividends (Indonesian and foreign sourced) and certain foreign-sourced income where that income is re-invested in Indonesia. The procedures to qualify for these exemptions and timeframes for reinvestment are to be set by a subsequent Minister of Finance regulation – these will be vital to understanding the practical utility of the new rules.

    a) Exempt from income tax dividends received by domestic corporate and individual taxpayers from a domestic company, provided such dividend is re-invested within Indonesia for a certain period of time. This will replace the existing exemption for Indonesian corporates receiving dividends from an Indonesian company in which it holds at least 25% of shares. It remains to be seen how intercorporate dividends will be dealt with under the proposed reinvestment exception.

    b) Exempt from income tax dividends received by domestic corporate and individual taxpayers from an offshore company, whether or not the offshore company is publicly listed, as well as from after tax profit from an offshore PE, provided such dividend is re-invested within Indonesia for a certain period of time.

  • Draft Tax Omnibus Law | 3

    c) For dividends received from an offshore private company and the after-tax profit of an offshore PE, a partial or full tax exemption will be available, depending on the extent to which the dividend or PE profits are reinvested in Indonesia. It appears that 70% of the dividend or PE profits should be non-taxable in all cases. The remaining 30% will be also non-taxable to the extent there is reinvestment in Indonesia. For example, on our reading, for a foreign dividend of $100, where a taxpayer can show reinvestment of $22, only $8 would be included in taxable income.

    A participation and branch profits exemption of this kind would represent a significant shift in the Indonesian cross-border taxation regime. Various existing regulations including on controlled foreign companies and foreign tax credits may need to be revamped and those implementing changes understood before the full impacts can be appreciated. It may be these rules are only intended to dictate the timing of deemed dividends from CFCs, and relief where there is reinvestment.

    d) Exempt from income tax offshore income received by domestic corporate and individual taxpayers from non-PE offshore business, provided such income is re-invested within Indonesia for a certain period of time and meet the following conditions:

    (i) Income is derived from an active offshore business; and

    (ii) It is not income derived from an overseas subsidiary.

    e) From a foreign tax credit perspective, foreign income tax that has been withheld on the above forms of exempt income:

    (i) Cannot be credited against income tax payable;

    (ii) Cannot be treated as expense or deduction against income; and

    (iii) Cannot be refunded.

    3. Reduction in the Article 26 interest withholding tax (WHT) rate

    The draft provides for a reduction in the Article 26 interest WHT rate from the current tax rate of 20%, to be regulated by a future Government Regulation. The reduction of the Article 26 WHT rate would apply to interest, including premium, discount and guarantee fee.

    4. Regulation on certain tax facilities, i.e. tax holiday, tax allowance, super deduction, regional tax facility, special economic zone (SEZ)

    As flagged in previous announcements, the Tax Omnibus Law would bring together various existing incentives under a common legal framework. The proposed tax facilities are as follows:

    a) An income tax facility in the form of a reduction or an exemption from income tax can be given to a domestic corporate taxpayer that conducts:

    (i) Capital investment in pioneer industries (i.e. tax holiday);

    (ii) Capital investment for main business sectors within the SEZ;

    (iii) Development and management of industrial area in a certain industrial area; or

    (iv) Capital investment in a certain industrial area.

    b) An income tax facility in the form of a reduction of gross revenue can be given to a domestic corporate taxpayer in relation to its expenses for:

    (i) Apprenticeship, internship, and/ or teaching activities to coach and develop human resources based on certain competencies (i.e. super deduction for a maximum of 200% of expenses disbursed); and/ or

    (ii) Certain research and development activities in Indonesia for certain period of time (i.e. super deduction for a maximum of 300% of expenses disbursed).

  • 4 | Draft Tax Omnibus Law

    c) An income tax facility in the form of a reduction on net revenue for a maximum of 60% of the capital investment amount can be given to a domestic corporate taxpayer that conducts capital investment in certain labor-intensive business sectors.

    d) Income tax facility that can be given to domestic corporate taxpayer that developed and managed a SEZ, to domestic corporate taxpayer that invest in a SEZ, or to domestic corporate taxpayer that invest in a special industrial zone. The income tax facilities are in the form of:

    (i) Reduction of net revenue for a maximum of 30% of the total capital investment;

    (ii) Accelerated depreciation and amortization;

    (iii) Carry forward tax loss period that is longer than 5 years but no longer than 10 years;

    (iv) A reduced tax rate of 10% for dividend paid to non-residents (or the applicable tax treaty rate);

    The above facilities are for capital investment in the main business activities or for other activities within the SEZ.

    e) Income tax facility in relation to foreign currency denominated Government securities that are traded in the international market. This income tax facility can be given in the form of exemption or reduction of income tax on:

    (i) Interest and discount of Go